Hedge funds turn to Asia - and airlines

Jonathan Shapiro

New York’s hottest young hedge funds are turning their attention towards Asian equities and airlines for the next big trade.

At Sohn Next Wave, held in New York’s Lincoln Centre ahead of the prestigious Sohn Investment conference, Chinese travel agent Ctrip, Indian telco Bharti Infratel, Japanese property company Goldstar and US airline JetBlue were the best trades touted.

Jason Karp, of $1.3 billion Tourbillon Capital Partners, could hardly contain his enthusiasm for the enormous potential of Nasdaq-listed Chinese travel company Ctrip.

As China’s middle-class grows, so does its propensity to travel. While China as a nation spends more on travel than other countries, on a per capita basis, it spends the least.

“Just imagine when the per-person spend on travel catches up,” Karp says. “There are very few companies that can give you 20 to 40 per cent growth in the past and in the future.”

Karp expects revenue for Ctrip to reach $7.3 billion in 2020, from less than $1 billion today, and says it is a Chinese version of runaway online travel stock Priceline, but with higher growth and a bigger market.

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As these factors change, Ctrip’s revenue could grow by seven or eight times.

He said analysts often underestimate the potential for parabolic growth. The consensus forecast for US online travel company Priceline’s share price in 2013 was $US9. Today it trades at $US41 ($44).

Ethan Devine, of Indus Capital, favoured Japanese property company Goldstar, a stock that could benefit greatly from Abenomics.

He cited the underappreciated potential of Japanese real estate, which he said was cheap by global standards – considering rental yields of 6 per cent can be achieved, while a 10-year mortgage was less than a per cent.

Kora Management’s Nitin Saigal went to his home country of India to explore companies to bet against. With high competition, excess capacity and corrupt regulators, Indian telco stocks appeared to be attractive shorts. But instead, Saigal says, he came to appreciate the enormous profit potential of Bharti Infratel, which operates mobile phone towers across the vast country.

As Indians rapidly embrace smartphones and mobile data, demand for the infrastructure will increase, allowing the company to generate cash and grow at a rate of 15 per cent. Saigal says at its implied valuation of seven times earnings before cash, it was extremely cheap – and expected the stock to double in two years.

He added that the old perception that emerging market stocks move in unison was wearing off.“In India, good stocks now go up and bad stocks go down. For emerging market long/short funds, this is a revolution,” he said.

Finally, Will Snellings, of the Marianas Fund, said he looked for investment opportunities in industries where structural change makes bad businesses into good ones. He found one in young US airline JetBlue.

Investing in airlines has often been considered to be a great way to lose money but Snellings says two structural changes have occurred. One is that consolidation has seen the top four airlines controlling more 80 per cent of the US market, resulting in more rational and predictable pricing behaviour.

Also the lowest-cost airline, Southwest, has seen its cost advantage eroded, forcing it to change its strategy from market-share grabbing to better pricing.